Chapter 6 - Time Value of Money

Question 1

Future Value

Answer 1

The worth in the future of an amount invested today, or the worth in the future of a series of payments made over time

Question 2

Present Value

Answer 2

the worth today of a future payment, or the worth today of a series of payments made over time

Question 3

Future value is _____ to the Present value

Answer 3

discounted

Question 4

Present value _____ to its Future value

Answer 4

grows

Question 5

What a dollar invested today will be worth in the future depends on:

Answer 5

(1) length of the investment period; (2) method to calculate interest (simple/compound); (3) interest rate

Question 6

2 types of methods to calculate interest

Answer 6

simple & compound

Question 7

Simple interest

Answer 7

calculated only on the original principal each year

Question 8

Compound interest

Answer 8

calculated on both the original principal and any accumulated interest earned up to that point

Question 9

Future value implies the _____ method

Answer 9

compound

Question 10

List equation: FV = ?

Answer 10

PV (1 + i) ^ n

Question 11

Discounting

Answer 11

taking future values back to the present

Question 12

Present Value Factor

Answer 12

reciprocal of the Future Value Factor –> 1 / (1+i) ^ n

Question 13

Present Value = ____ x _____

Answer 13

Future value X Present Value Factor

Question 14

Annuity

Answer 14

a series of equal payments made or received at regular time intervals (i.e. mortgage, auto insurance)

Question 15

Ordinary annuity

Answer 15

a series of equal annuity payments made or received at the END of each period

Question 16

Annuity Due

Answer 16

series of annuity payments made or received at the BEGINNING of each period

Question 17

Future value of an annuity

Answer 17

what an equal series of payments will be worth at some future date

Question 18

Future Value Factor of an Annuity (FVFA)

Answer 18

a factor that when multiplied by a stream of equal payments equals the future value of that stream

Question 19

Present value of an annuity

Answer 19

what the series of payments in the future is worth today

Question 20

Present Value Factor of an Annuity (PVFA)

Answer 20

a factor that when multiplied by a stream of equal payments equals the present value of that stream

Question 21

Perpetual annuity is also known as

Answer 21

Perpetuity

Question 22

Perpetual annuity

Answer 22

a stream of equal payments at regular intervals indefinitely, with no end date

Question 23

in perpetual annuities, the period is

Answer 23

infinite

Question 24

in perpetual annuities, the donation has ____ and the donor _____

Answer 24

indefinite life; demands that income from donation to be used for specific purpose

Question 25

List equation: Perpetuity $ = ?

Answer 25

Initial investment x interest rate

Question 26

perpetual annuities helps determine

Answer 26

the lowest interest rate at which you would need to invest a donation in order to generate a specific, predetermined level of income

Question 27

all calculations can be made using

Answer 27

tables or spreadsheets